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Australia’s Attractive Valuations in ETFs

Exchange traded funds tracking equities in developed markets outside the U.S. have been getting plenty of attention this year. Japan ETFs have been in the spotlight due to a rising yen that is seen as negative for Japanese stocks.

Likewise, Europe ETFs have been punished by Brexit and the ongoing disappointments delivered by the European Central Bank, which has not delivered enough in the way of added stimulus to appease global investors. All the while, the iShares MSCI Australia ETF (EWA) is higher by nearly 6%.

Related: Aussie Dollar ETF Plunges as Reserve Bank Cuts Rates

Although EWA is not a currency hedged ETF, one of the reasons it might be moving higher is the Reserve Bank of Australia’s (RBA) consistently loose monetary policy. RBA recently cut Australia’s benchmark interest rates to a record low. However, EWA, which is not a currency hedged ETF, has performed well in the face of RBA rate cuts.

Australia’s benchmark interest rate of 1.75 percent is a record low for the country, but well above most other developed markets, indicating there is room for further downside. Importantly, some market observers view Australian stocks as attractively valued, a bonus when considering the world’s 12th-largest economy has not seen a recession in a quarter century.

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“We feel there is a reasonable chance of a >10 percent total return in the next 12 months thanks to a resurgence in the banks’ popularity with investors,” according to a Seeking Alpha analysis of EWA.

Related: Down Under Opportunity

Thanks to comparatively high interest rates, Australia ETFs like EWA sport enticing dividend yields, which can help investors generate current income while expanding the international portions of their portfolios. EWA has a trailing 12-month dividend yield of 6%, or nearly triple the comparable yield on the S&P 500.

There is some speculation that RBA is nearing the end of its lengthy tightening cycle. If that is the case, the Australian dollar and the CurrencyShares Australian Dollar Trust (FXA) , which tracks the Aussie against the U.S. dollar, could get a lift. That could be a boost to the unhedged EWA.

“At the same time we continue to believe that U.S. rates will rise at least once this year. September may be looking unlikely, but by the end of the year we expect to have seen at least one rate increase,” notes the Seeking Alpha piece.

iShares MSCI Australia ETF


The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.